It was Saturday afternoon, and I had just come to the end of my second week in Nairobi. A friend of mine has her finger on the pulse, and she had heard that an Australian girl was running boozy brunches out of her leafy backyard in Lavington – so along we went. The afternoon was warm, as the thick clouds had rolled away, and the sun fell dappled on the hipster tablecloth through the sprawling arms of an acacia tree.
My friend works here for a social enterprise marketing fast moving consumer goods to people at the base of the pyramid; her colleague had also joined us for brunch. Together they spoke passionately about their enterprise’s business model, marketing products like gas cookers and solar lamps to people living in Nairobi’s vast slums. It’s a fascinating operation, introducing new products to the Nairobi market, running almost as a non-profit.
The conversation moved around the table and my friend’s colleague asked me what I was doing in Nairobi.
I explained that I was on a summer placement for my master of public policy with the Fusion Group, a financial services and investment company based out of Nairobi and London. It’s engaged in a mix of investment activities, including real estate and small-medium enterprise-focused private equity. For my summer project I am examining the case for public investment into SME private equity funds by Development Finance Institutions (DFIs) such as the IFC, OPIC and the CDC.
Fusion started life as a micro-lender and then, after several years, shifted its loan-book across to a subsidiary and began providing mezzanine finance and small equity stakes to small businesses.
“Exciting!” my friend’s colleague said, nodding vigorously.
“And now”, I continued “they are now shifting their focus again to only making private equity investments into SMEs.”
“Oh. Not so exciting”, she said, as it became apparent that Fusion was a solidly for-profit enterprise.
At the time I found this reaction puzzling, but didn’t give it much further thought. However after reading a blog last week by Pamela Hartigan, the Director of the Skoll Centre for Social Entrepreneurship at the Said Business School, it came back to me and set me thinking.
Hartigan’s core thesis is that social enterprise has become a distraction from the systemic change the business world needs because it dichotomises “entrepreneurial practice … [creating] a false separation between ‘this is where we make money, and this is where we do good’”. The key to sustainable capitalism, Hartigan suggests, is “reasonable profits as opposed to maximising profits”.
I think Hartigan’s critique isolates the issue precisely. Like the social enterprise where my friends work, many make little or no profit. What then, I am left wondering, makes such enterprises meaningfully different from traditional NGOs? With social enterprises increasingly running as non-profits, we are reverting to the dichotomous system we began with: one large segment of human activity disconnected in important ways from civic responsibility, and the other devoted largely to correcting the ills that the former creates. Social enterprise isn’t helping us mitigate the divide.
This doesn’t mean I agree with Hartigan’s conclusion that business can and should solve pretty much any social problem, and that we need every businessman and woman to be a social entrepreneur. There are still goods and services which markets will be unable to provide, and we need non-profits and governments to overcome these market failures, and to uphold society’s norms and standards of fairness and justice.
But I do agree with Hartigan’s assertion that business needs to undergo some systemic changes which the social enterprise movement has been unable to effect. I suggest “enterprise citizenship” as the model for this change.
Enterprise citizenship reflects for businesses the idea of membership in society that applies to individual citizens. It generalises the language of citizenship from the sphere of the individual, to the institutions in which we spend much of our time. Citizens shouldn’t have to check any of their social values and norms at the door when they go to work – they should instead be guided by them. The “reasonable profit” Hartigan envisions must emerge from the sum of the decisions made by directors, executives, middle managers and employees exercising their moral and ethical judgement as citizens, guided by an ethic of enterprise citizenship.
Enterprises cannot escape their responsibilities of citizenship to society, and social enterprise is not helping us achieve this change. But a movement for true enterprise citizenship can.
I have written before about corporate citizenship, and the idea of enterprise citizenship I am espousing here is essentially the same. However, I think the advantage of the enterprise citizenship concept is that it can be applied more broadly to businesses of all sizes, rather than only the largest corporations who can “afford” it. Furthermore the term is free of some of the negative associations that have grown around Corporate Social Responsibility programs – of tokenism and branding rather than a real commitment to society.
So to return to where I began, what makes micro-lending and social enterprise more “exciting” than private equity for SMEs? I suspect it has something to do with the fact that the latter involves a company earning returns by supporting growing businesses to adopt mature technologies (bakeries and sack factories for example), rather than working as a social enterprise, sacrificing profit and working directly on poverty alleviation with microenterprises. I think we can see here Hartigan’s diagnosis in relief: the form and mystique of social enterprise distracting us from the attainment of the good – in this case the creation of better jobs and growth.
Studies indicate that large firms are not only much more productive than small firms; they also account for a large share of total employment, pay their employees better wages, and export more. Recent studies have added texture to this: young, small firms account for a disproportionate share of net employment growth, conditional on survival. These findings tell us that it is vital to provide support (including finance) to young, growing firms so that they can become larger and more productive, contributing more and better jobs to enable more people to secure better livelihoods.
Businesses like Fusion are trying to find a way to sustainably finance such businesses in developing countries. This will require a model which yields adequate returns. But when the market fails or enterprises are not fulfilling their duties of citizenship there remains a strong case for government intervention. The nascent SME PE market is a case in point; at the moment it needs pioneers to test business models which others can copy – but pioneering reveals market information which can outweigh first-mover advantages. Catalytic DFI investment in privately managed funds is justified to help identify successful fund models and correct the market failure – stimulating job creation and growth as the young businesses they invest in become more productive.
If this is an example of what can be achieved with companies making returns and conducting their affairs with an ethic of enterprise citizenship, with governments intervening when we need them to, then that’s exciting enough for me.
Tim McMinn is a BSG MPP student currently undertaking his summer project in Nairobi, Kenya. Find Tim on Twitter: @tim_mcminn